by Jeff Sovern
Acting Comptroller of the Currency and former bank lawyer Keith Norieka has an op-ed in The Hill, Senate should vacate the harmful consumer banking arbitration rule, that is seriously flawed. I'm going to write about two of those flaws here.
First, Norieka concludes by writing:
Instead of mandating only one way to resolve disputes, consumers and banks should continue to have the option to resolve contractual differences in the same manner that they do today, and consumers should exercise their market power to choose among institutions that use such clauses and those that do not. Consumers know for themselves what their best options are, and their regulators need to know that too.
It is all very well to say that consumers should exercise their market power to choose institutions that don't use arbitration clauses, but the fact is, consumers can't do that. A study I co-authored found that consumers not only did not understand arbitration clauses, many thought they were unenforceable. Many of our findings were replicated in the CFPB's own study. Not only has no study found that consumers understand arbitration clauses, but the industry itself has acknowledged that consumers don't read credit card contracts. If consumers don't read contracts, how can we expect them to recognize, let alone act, on whether a contract includes an arbitration clause? Saying that Congress should block the rule because consumers should act in ways we know they don't is like saying doctors shouldn't treat obesity because people shouldn't overeat.
Second, Norieka writes:
In September, OCC economists completed their review of the CFPB’s analysis. Their review found the data actually show an 88 percent chance of the total cost of credit increasing, and the expected increase is almost 3.5 percentage points [if the CFPB rule takes effect].
Elsewhere, Norieka notes that about half of all credit card issuers don't use arbitration clauses. If Norieka's economists' findings were correct, that would imply that the half of credit card issuers who don't already use arbitration clauses prefer to charge much higher interest rates over adding an arbitration clause. But how likely is that? Who are these credit card issuers who charge higher rates because they don't use arbitration clauses? Why wouldn't they simply add an arbitration clause to their contracts to make their credit cards more competitive? There's no evidence that consumers would punish credit card issuers who use arbitration clauses by closing their accounts (remember that consumers don't read the contracts, so they wouldn't know about the clauses, and wouldn't understand them if they did read them), so just by adding a paragraph to their contracts, credit card issuers could make their cards more attractive, if Norieka's economists are right. This sounds like one of those cases in which economic analysis is at war with reality.
